The Impact of Taxes on Charitable Giving: Empirical Evidence from the Korea Labor and Income Panel Study

Abstract

Households’ or individuals’ decision regarding charitable giving may differby type of recipient of the gift. In light of the relative paucity of empirical research on the impact of tax incentives on charitable giving outside Western countries, empirical research on this topic in South Korea is valuable in order to compare effects across difference tax regimes and in different institutional environments. We use the Korean Labor and Income Panel Study (KLIPS), whose panel structure helps alleviate the omitted variable bias that has often appeared in previous literature using cross-sectional data. This study aims to perform a robust estimation of tax price and income elasticities for charitable contributions in South Korea. First, we use exogenous changes in tax rates resulting from Korean Tax Reform to construct instrumental variables (IVs) for the change in the price of giving. Two tests are undertaken to determine whether the IVs are weak or not: a size-corrected test of a weak IV robust inference for the linear instrumental variable model with autocorrelation and heteroscedasticity recently devised by Finlay and Magnusson; and the LIML CUE-GMM estimation. We find that our instruments are not weak. Following Smith and Blundell, and Rivers and Vuong , we then estimate the random effect (RE) Tobit Model using acontrol function based on the IVs. Using the procedure developed by Mundlak, we estimated a fixed effect model from the RE Tobit model. The tax price and income elasticities from the pseudo-fixed effect Tobit model are found to be significant and the magnitudes are similar to those from the GMM fixed effect and CUE-GMM models. To investigate additional features of the conditional distribution of charitable giving in South Korea, we use the Censored Quantile regression with instrumental variables (CQIV) recently proposed by Chernozhukov, Fernandex-Val, and Kowalski. These estimate indicate that the price elasticity of charitable giving is very heterogenous among donors, while income has a quite uniform and positive effect over the whole range of the giving distribution significantly.